Motorola Buy Delivers Google More Heartbreak Than Help

Google, owner of the most-used search engine and the Android operating system for wireless devices, estimated in regulatory filings that $5.5 billion of the purchase price for Motorola was for patents and developed technology. Photographer: Spencer Platt/Getty Images

April 29 (Bloomberg) -- Google Inc.’s $12.4 billion
purchase last year of mobile-phone pioneer Motorola Mobility
Holdings partly for its trove of more than 17,000 patents is
showing signs it wasn’t much of a bargain.

A federal judge last week said Microsoft Corp. owes only
pennies in royalties per sale of each Xbox video-gaming system
and Windows operating system instead of the potential billions
of dollars Google sought in a patent-infringement case. Four
days earlier, the Google unit lost another patent case against
Apple Inc.

Google, owner of the most-used search engine and the
Android operating system for wireless devices, estimated in
regulatory filings that $5.5 billion of the purchase price for
Motorola was for patents and developed technology. Chief
Executive Officer Larry Page in August 2011 said Motorola’s
patent portfolio would “help protect Android from
anticompetitive threats from Microsoft, Apple and other
companies.”

“It wasn’t an irrational decision at the time but they’ve
gotten nothing but heartbreak for that money,” said Rodney
Sweetland, a patent lawyer with Duane Morris in Washington who
has watched the legal disputes over smartphones. “Should they
have bought? Not at that price.”

While the acquisition may have deterred Apple and Microsoft
from filing new patent lawsuits against it, Mountain View,
California-based Google hasn’t won a decisive legal case with a
big payoff -- such as a lucrative licensing deal. Motorola’s
patents also opened up the company to increased antitrust
scrutiny, leaving Google to face legal battles in Europe and the
U.S. with patents that may not be as valuable as investors
thought.

’Striking Out’

Since Google acquired Motorola Mobility in May 2012, most
of the company’s efforts to limit sales of Microsoft’s products
in Europe have been averted, a U.S. judge in Chicago threw out
claims Apple and Motorola Mobility lodged against each other,
and a U.S. trade panel rejected claims against Apple over
wireless technology.

“They just keep striking out when they have all this
ammunition allegedly behind them,” said Will Stofega, a program
manager at Framingham, Massachusetts-based researcher IDC.
“They don’t have any home runs to show for it.”

U.S. District Judge James Robart in Seattle on April 25
released his decision that Google’s Motorola unit isn’t entitled
to royalties of 2.25 percent of retail sales it sought for Xbox
and Windows, which Microsoft estimated would cost it $4 billion.
Instead, Robart put the value of patents for video-decoding and
wireless technology at a few cents per unit, equal to about $1.8
million, according to Microsoft.

Long-term Investment

On April 22, the U.S. International Trade Commission in
Washington invalidated Motorola Mobility’s patent on a phone
sensor in a case that could have limited Apple’s ability to ship
Chinese-made iPhones into the U.S.

“We acquired Motorola to level the playing field in patent
attacks against Android and draw on Motorola’s long history of
innovation,” said Matt Kallman, Google’s spokesman, in an e-mail. “In just under a year they’ve accomplished a lot, with
impressive velocity and execution. We’re excited about
Motorola’s future.”

The greatest value to the patents so far is in what didn’t
happen, Sweetland said. The patents didn’t fall into the hands
of a Google rival, nor did Motorola Mobility become like
Ericsson AB or Nokia Oyj, using litigation to try to recoup the
billions they spent on wireless research.

Handset Help

When Google announced in August 2011 it was going to buy
Motorola Mobility, it was being criticized by handset makers for
not helping them fight off patent lawsuits over phones running
on Android, the most popular operating system for mobile
devices.

Google at the time had fewer than 1,000 of its own patents,
most related to search. The company needed to bolster its
negotiating position for a licensing deal that would protect all
Android customers because in a typical patent dispute,
competitors assess each other’s patent holdings, with net
licensing fees going to the company with stronger patents.

“It definitely has taken a lot of pressure off Android,”
said Colin Sebastian, an analyst with Robert Baird & Co. “There
was the appearance of multiple storm clouds in the patent
litigation for Android until they closed this acquisition.”

Apple, which contends that Android phones copied the look
and features that made the iPhone so popular, brought cases
against Motorola Mobility, HTC Corp. and Samsung Electronics Co.
Microsoft, whose Windows operating system dominates on personal
computers, likewise demanded royalties from companies that made
products using Android.

Even as it fights in courts with Motorola Mobility,
Microsoft has been landing patent agreements with manufacturers
that use Android software, such as Samsung, HTC and ZTE Corp.

Portfolio Value

Given the results of the litigation, “the perceived value
of the portfolio is clearly less” than what Google paid, said
Erin-Michael Gill, managing director of MDB Capital Group LLC, a
Santa Monica, California-based investment bank that specializes
in patent issues.

The Motorola Mobility unit generated $4.14 billion in
revenue last year, about 8 percent of Google’s total sales, and
had about $1.1 billion in losses, according to data compiled by
Bloomberg.

Page is streamlining the unit to bolster efforts in the
smartphone and tablet market. The Motorola Home set-top box
division was sold for about $2.35 billion, and more than 5,200
jobs are being cut. Stofega said investors are looking for new
devices or innovations to come out of Motorola Mobility, perhaps
at the Google I/O 2013 meeting in San Francisco next month.

Patent Sprees

“Motorola has a great set of assets,” Google Chief
Financial Officer Patrick Pichette said at a conference in
February. “It had a pipeline of products that were fine, but
not really to the standards that Google would say is wow,
innovative, transformative. So you invest for the long term.”

The $12.4 billion price Google paid reflected in part the
market at the time, when smartphone companies were driving
patent prices into unheard-of levels. Two months before, a group
led by Cupertino, California-based Apple and Redmond,
Washington-based Microsoft beat out Google to buy patents owned
by Nortel Networks Corp., paying an unprecedented $4.5 billion.

Motorola Mobility, like Nortel, was involved in the
earliest development of wireless technology. Motorola Inc.’s
$3,995 DynaTac, the brick-sized first commercial wireless phone,
was made famous in the 1980s by corporate raider Gordon Gekko in
the movie “Wall Street.” In buying Motorola Mobility, Google’s
thinking was that Apple and Microsoft would reach reasonable
licensing deals with companies making Android phones.

“They’re clearly in the position of weakness,” Gill said.
“With each of these setbacks, the risk of having to enter into
a materially negative licensing agreement is only increasing.”